Oil falls $2 on China inflation concerns

London, January 20, 2011

Oil prices fell by more than $2 to below $89 per barrel for the first time in 10 days as concerns about high US inventories and Chinese inflation outweighed positive US jobless data.

US crude futures fell by two per cent to $88.62 per barrel by 1444 GMT while ICE Brent future for March were down by $1.90 at $96.26 per barrel, keeping the spread between the two grades at an unusually high level of about $7 per barrel.

The market was in negative territory for most of the day but losses were modest until after the start of US trading hours when crude began plunging.

'What we are seeing now is the impact of the US market opening after the release of the Chinese statistics during the night,' said Christophe Barret from Credit Agricole.

'A very strong impact in crude stocks was relatively bearish. The Transatlantic pipeline (outage) is finished so there is room to pressure the market to go down,' he added.

US crude inventories meanwhile rose by 3.5 million barrels in the week through January 14, the American Petroleum Institute (API) said after the close on Wednesday, surprising analysts expecting a 600,000 barrel drawdown in a Reuters poll.

The stock build weighed on oil futures, seeming 'to have given the market a bearish tinge post-close,' the JBC Energy markets research team commented on Thursday.

Stock inventory data to be released by the EIA on Thursday at 1600 GMT is expected to show a draw in US crude inventories following the outage of Alaska's main pipeline last week.

A larger-than-expected drop in US oil inventories or a pick-up in demand could lead to Brent breaking above $100 a barrel, Credit Suisse analysts said in a note.

In the absence of an unexpectedly large stock draw in the EIA's report or positive economic data from the US, analysts say the recent oil market rally may have run out of steam.

Analysts argue that a persistently weak US dollar has helped offset bearish signals from the world economy and global supply. The US dollar rose 0.3 per cent versus other currencies following the jobless report.-Reuters